The One Thing You Can Do that Warren Buffett Can’t

Everybody (including me) loves Warren Buffett. He’s rich. He’s a major philanthropist who actively exhorts other rich people to give away their money. And he looks like an ideal grandfather ought to look: gray, smiling and enjoying life.

Warren gets quoted a great deal in the financial community, and what he says is often well worth quoting, containing as it does a simple wisdom with a healthy dose of dry Midwestern humor.

Combine all that with the fact that Mr. Buffett is still actively running his business at age 85 (A-shares of Berkshire Hathaway (BRK-A) are trading at just over $221,000), and he’s something of a stock-investing saint. What a role model!

Now, if you thought I was going to reveal some secret fault that would tarnish Warren’s image, you’re wrong. I don’t think this idol has feet of clay. What you see with Warren Buffett is just what you get.

But I do think Warren Buffett has a little bit of a regret, and it’s this: he can’t play the market the way he used to.

Back in 1999, in an interview with Businessweek, Buffett recalled the following: “The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money.”

You can almost hear the nostalgic excitement in Warren’s voice as he recalls the thrill of kicking the Dow’s butt.

Sadly, he can’t do that any more. Oh, sure, he still beats the Dow, but that’s a pretty paltry goal for a growth investor these days. Commentators are watching closely to see whether the Dow can hold above 18,000, but there’s less talk about how long it’s been since it first topped that magic number. (It was December 2014.)

The Individuals’ Big Advantage of the Institutions’

So, what can you do that Warren Buffett can’t? You can buy or sell a position by just hitting a key. Warren can’t do that.

For a large investor (like a mutual fund or hedge fund manager or a private equity trader), laying on or exiting a large position—without inflating or depressing the price—requires patience and skill. If you sell too quickly, the excess supply will lower the price, which will reduce the amount you get from the sale. And if you’re too enthusiastic about buying, you will cost yourself money as the price rises.

I often see evidence of careful corporate buying when a stock’s price stays in a flat range for days or weeks. When the stock dips below a target price, institutional buyers step in and buy all they can without jacking the price up. And it’s the same on the upside, when a whale sells every time a stock rises above a price target.

As an example, here’s a chart of Agnico-Eagle Mines (AEM) that shows careful accumulation at 26–27 and selling at 30. This action reflects the institutional players who were getting their bets down on the precious metals sector. You can also see the buying at 33 in February as the major money managers carefully increased their exposure.

As Warren Buffett knew in the 1950s, a small investor can take on more risk because buying and selling take only seconds. But a big investor who’s laid on a position in Domino’s Pizza (DPZ) can only respond to a big dip like today’s with an order to sell that may take weeks to complete.

Many individual investors who are enjoying today’s huge gap up in Facebook (FB) may be puzzled by how the stock pulled back from its open today at 121. But if they think about the institutional investors whose positions in FB stock are now too high for their risk disciplines, they will understand if corporate selling holds the price down—or even drops it by a few points—as the slow-but-sure process of institutional selling takes its gradual toll.

Individual investors can also expect other whales to buy in as long as they can get the price they want.

I like to think that Warren Buffett occasionally envies the freedom of individuals who subscribe to Cabot advisories—like the Cabot Growth Investor folks who had FB on Hold ahead of its earnings report yesterday. Cabot Growth Investor bought FB in August 2013, and is now up 199% in the stock.

It’s the kind of big move that would have warmed Warren’s heart when he could still buy and sell at the drop of a hat.

This Stock is Getting a Nice Tailwind from its Quarterly Report

My stock pick today is TAL Education (XRS), a Chinese education stock that we covered in Cabot Top Ten Trader in early February. The stock made a nice move today after reporting earnings before the market opened this morning. XRS is now up from 49 to 59 since April 5, and with a nice tailwind from a well-received quarterly report, the stock should have more fuel in its tank.

And as an individual investor, you can buy it here today.
But if you’d like to receive more information on the stock or additional momentum stocks featured in the advisory, consider taking a trial subscription to Cabot Top Ten Trader. The advisory has a great selection of momentum stocks ready to break out. Since the beginning of the year, we handed investors 67 winning trades and there are many more to come.

Latest Videos

Upcoming Events

• How to Make Money in the Age of US-China Rivalry + 3 Global Stocks to Buy NowFREE Webinar with Carl Delfeld, Chief Analyst of Cabot Global Stocks Explorer
Wednesday, October 23 at 2:00 PM ET |Learn More

Reviews

"The only accurate investment letter about investing in China."

-A. M., Wadsworth, Illinois

Market Update

From Cabot Top Ten Trader

To say it’s been a topsy-turvy week has been an understatement. The rotation that we started to pick up on a couple of weeks ago was unleashed late last Friday and the first couple of days of this week, with just about any stock and sector that’s enjoyed a good run this year coming under pressure—including more than a few names that flashed abnormal intermediate-term action. Right now is basically the definition of an environment where you should take things on a stock-by-stock basis. If your loss limits are tripped, sell. If a decent winner you had is back to breakeven, put in a tight stop. And if you have a good-sized winner that’s tripped its stop, sell at least some of your shares, if not all.